Alan Kohler is one of Australia’s most experienced business commentators. Alan has been a trusted source of investment advice to Australians for many years, and in 2005 he founded Eureka Report - Australia’s #1 online investment report. Along with Robert Gottliebsen and Stephen Bartholomeusz, Alan also founded Business Spectator, the popular business news and commentary website. Alan is the regular finance presenter on the ABC News and producer of the popular nightly graph (or two).

Australia’s dirty electricity rip-off

The chart below using data from a report by Bruce Mountain of Carbon Market Economics poses a pretty tough question to Australian energy policymakers: How is it that Australians are paying some of the highest household electricity prices in the world and yet their electricity is by far the most polluting, and we aren’t even paying a carbon tax?

While Australia gets pipped by Estonia as the most polluting electricity supply in the developed world (pollution illustrated by the blue line), we stand in stark contrast to the rest of the OECD in paying some of the highest prices (the red squares) for residential electricity while emitting about double the CO2. The only two countries that currently manage to pay more than us for electricity are Germany and Denmark, but at least they can point at a range of leading renewable energy companies and tens of thousands of people employed in the sector. They also happen to be far more efficient than Australia in using energy, so the high prices have lesser consequences. What’s worse is that, according to the Australian Energy Market Commission (AEMC), we’ll be paying more than Germany in a few years even if we rescind the carbon price.

In the past we could smugly point out that while we might be horrible polluters, and incredibly energy inefficient, we paid some of the lowest prices for electricity in the world. Now we’re losing on all counts.

Something is clearly going wrong here and it’s got absolutely nothing to do with the carbon price (the carbon price would only add 1.74 cents to the above figure, according to the AEMC).

But it’s not anything to do with the wholesale electricity market – wholesale market electricity prices today are stuck at close to their historical lows and are well below those in most of the countries illustrated above. Prices in Australia are likely to rise in the future due to the boom in coal and gas exports, but they aren’t driving any real problems now.

And it’s not due to renewable energy support policies, which according to the AEMC add less than a cent to the price illustrated above. Plus, there’s plenty of countries in the chart above with far more aggressive renewable energy support programs than Australia that are paying far less for their delivered electricity.

The problem lies squarely with electricity networks. The regulator signed away $40 billion over the next five years and there’s nothing we can do about that. What we need to worry about is making sure we don’t make the same mistake at the next regulatory approval stage in another few years time.

So what’s the solution?

Well it certainly isn’t government ownership. Government-owned network businesses are the worst offenders according to Bruce Mountain. In fact, I’d suggest that government ownership is partly at the root of the problem. You’ve got government setting the rules governing these networks, and at the same time potentially profiting from rules that encourage excessive electricity demand.

The solution is, in fact, markets and price signals. It’s just they’ll need the government to come in and create them, just like they created the wholesale National Electricity Market.

What do I mean by this?

Well, imagine if Woolworths and Coles decided they would remove price labels from all the goods in their stores. Also, rather than giving you an itemised docket at the checkout, they instead sent you an invoice every two months with absolutely no itemisation to identify what items were costing you a lot or a little. You’d be a little bit angry wouldn’t you?

But that’s exactly the way electricity is charged to households. What’s worse, imagine the supermarket then smeared out or averaged out costs across various items so that even if you bought the low cost, no-name brand tin of baked beans, you’d pay the same price as the guy next door who buys some kind of exotic, organic baked beans flown in via aeroplane from South America. Well that happens too. The guy next door who buys a $1500 air conditioner imposes a cost in extra infrastructure and operating costs of $7000 that gets smeared across all consumers (according to the draft Energy White Paper).

To fix this we’ll need to roll out smart meters and new pricing structures that deliver sharp incentives to curtail demand during periods likely to involve high levels of electricity demand. But we must also ensure that customers have a convenient and timely way of receiving the information from the meter. There’s no point spending billions of dollars, like Victoria has done, on smart meters that you have to go outside to read. And all they give you is total historical electricity consumption with no indicator of what you’re consuming right now, nor its cost. Trying to charge people through the nose for their electricity while giving them no way of knowing when these charges might hit, and how they could be avoided, won’t improve the situation.

We also need to provide a transparent, standardised payment system for electricity generators who could reduce the load placed on network infrastructure during peak demand periods. Publicly disclosed, standing offer prices should be set across each network area for the provision of a kilowatt of generation (irrespective of fuel source) during periods of high demand. This should not be subject to a confidential one-by-one negotiation with the monopoly network business.

We shouldn’t delude ourselves that this is going to get spontaneously fixed by the private sector. Network businesses have a disincentive to fix it because reduced peak demand means less profit for them. Retailers aren’t too bothered either because the smearing of charges leaves them and their competitors all in the same boat.

This was made pretty clear in a stakeholder meeting convened by the Victorian Utility Regulator many years ago about the rollout of smart meters. At this meeting a network business provided a presentation illustrating they would lose money from sharp peak pricing and argued they should be compensated!

At the same time as rolling out more intelligent pricing, we need to create a market for businesses to help consumers save energy. Even with the most clever pricing and good information feedback, electricity is still pretty small beer for most household budgets. Study after study illustrates that consumers fail to pay adequate attention to energy operating costs when buying goods that consume energy in operation. The National Energy Saving Initiative currently being considered by the federal government may be a good way to address this problem provided they get the design right.

Based on experience from overseas this set of actions is likely to lower not just electricity prices, but also electricity consumption and carbon emissions. But it will take courage from politicians to shake-up the existing system with Neanderthals like the Herald-Sun and Daily Telegraph around. And it certainly won’t get fixed by a tiny carbon price.

POSTSCRIPT - Response to reader comments about electricity price

The price for Australian household retail electricity represented in the chart above is based on estimates by the Australian Energy Market Commission of what we can expect within the next few years taking into account electricity network expenditure that has already been signed off by the regulator. It is substantially higher than what people may be currently paying due to legacy contracts and the fact that most of the network charges are yet to hit us. This is all detailed in the AEMC report, Possible Future Retail Electricity Price Movements: 1 July 2011 to 30 June 2014